The Scope of ESG-Related Obligations Under International Supply Contracts －Focusing on the Obligations related to the Social Factorsㅡ

The recent trend emphasizing ESG has brought a shift in the corporate management paradigm. ESG goes beyond the emphasis on corporate social responsibility and extends the legal liability of corporations for breach of contractual obligations. If the contract does not contain explicit and specific provisions regarding ESG-related obligations, it is difficult to define the content and scope of ESG-related obligations. This article examined how S-related obligations, especially the obligations related to the human rights and work environment can be derived under traditional contract law principles and reviewed how S-related obligations can be effectively incorporated into contracts. This article focused on the legislation and precedents in the United States and made a practical implication for Korea. S-related obligation can be divided into (1) the obligation to accurately state S-related information, and (2) the obligation to perform social factors. First, regarding the obligation to accurately state S-related information, the US courts does not interpret S-related information as “material” fact that companies have duty to disclose. According to the US precedents, the materiality could only be established when there is physical defect relating to the central function of the product or a safety defect causing a safety hazard. And the claims based on aspirational statements articulating a company’s forward-looking goals also have been dismissed. Unless the S-related statements of a company amount to concrete and specific commitments, the company will not be held liable for violating the consumer protection laws. On the other hand, California Transparency in Supply Chains Act of 2010 (hereinafter “CTSCA”) is a positive step to combat forced labor and human trafficking in supply chain, but it has some structural deficiencies; (1) it merely mandates disclosure of information and does not ask for accurate and up-to-date information to be disclosed, and (2) it does not establish sufficient penalty scheme for the non-compliance by companies. Next, regarding the obligation to perform social factors, it is difficult for a buyer who does not exercise control over a foreign supplier’s way of performing work or the employment of workers to be obligated to manage the social factors in international supply chain unless expressly provided in the contract. And international norms such as the UN Guiding Principles on Business and Human Rights (UNGP) and the OECD Due Diligence Guidance for Responsible Business Conduct, etc. are insufficient to recognized as a binding “usage”. When incorporating S-related obligations into a contract, it is important to provide explicit regulations on the disclosure and performance of social factor in the contract. This article examined the American Bar Association’s Model Contract Clauses (hereinafter “MCCs”) version 1.0 and version 2.0, and recommended companies to use MCCs version 2.0 in practice. MCCs version 2.0 manages supply chains balanced and efficient way by establishing a regime of human rights due diligence. Considering the above analysis, the implications for Korea can be summarized as follows. Regarding the practical implications, Korean companies need to make more concrete and specific commitments on S-related information rather than making abstract and aspirational forward-looking statements. Accordingly, the S-related liabilities of companies will be recognized in more cases, but it will ultimately contribute to realizing the ESG value in the international supply chain. And when concluding international supply contracts, Korean companies can efficiently manage social factors in international supply chains by inserting model contract clauses such as MCCs version 2.0, which introduces human rights due diligence system, into contracts. As a legislative implication, it is desirable for Korea to enact a special law regulating international supply contracts in the near future. This special law should (1) stipulates due diligence on social factors, (2) ensures that accurate and up-to-date information on social factors are disclosed and implemented, and (3) provides an effective penalty scheme for non-compliance to guarantee the fulfillment of obligations.